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LNG hopes stir Canadian gas drilling Many industry leaders calling for more drilling in British Columbia to support export; others says orders, approvals needed first Gary Park For Petroleum News
Canada’s natural gas sector is showing hints of recovery after three years of languishing in a commodity price trough.
But the revival of upstream activity is tied mostly to the belief — not shared by everyone — that British Columbia needs to establish the gas resources to back LNG exports.
Although the first LNG shipments from the Pacific coast are at least two years away, and probably five years if any of the five major projects receives corporate sanctioning, many industry leaders argue there is no time to waste.
Others suggest that until proponents obtain regulatory approvals, secure off-take orders in Asia and decide to enter the construction phase it’s too soon to embark on full-scale gas drilling programs.
Even so, E&P companies, many of them partners in LNG ventures, are not waiting for the official starting gun.
RBC Capital Markets estimates the British Columbia’s tentative LNG export plans require 6.4 billion cubic feet per day of new volumes, compared with the province’s current production of about 3.75 bcf per day and Canada’s total 13 bcf per day.
The focus is on coaxing gas from the British Columbia shale gas deposits in the Montney, Horn River, Cordova Embayment and Liard formations.
RBC said the number of permits issued so far this year for new gas wells is up 50 percent from the first half of 2012, while the Petroleum Services Association of Canada remains hopeful that British Columbia drilling levels for 2013 will increase by 13 percent from 2012.
Spending projected to grow The Conference Board of Canada forecast in a June report said capital spending by service companies should be healthy over the next four years after increasing by 36 percent in 2011 and 24 percent in 2012.
Based on the board’s projections, spending this year is forecast to reach C$7.9 billion, C$8.18 billion in 2014 and C$9.28 billion in 2015.
The report estimated revenues in the service sector will grow by an average 8 percent a year by 2017, reaching an estimated C$46.39 billion.
The heavy-hitters among drilling contractors are Precision, Trican Well Service and Ensign Energy Services, but about 82 percent of Canada’s service companies have payrolls of 10 or less.
In the Montney, LNG proponents — Petronas’ Progress Energy Canada and Shell — account for 113 of the new well permits, or 87 percent of the yearly increase, RBC analyst Dan MacDonald said in a note.
He said that although the uptick is no guarantee of future drilling activity, it is welcome news for the service sector and could raise demand for pressure drilling and deep drilling by 2.3 percent and 3.8 percent respectively from last year.
Bruce Edgelow, vice president, energy, at ATB Corporate Financial Services, said in a note that the amount of gas needed to fill the anticipated LNG contracts should generate “pretty steady” work.
Average of 40 active rigs The fractional gains saw gas-prone British Columbia record an average 40 active rigs in the first half of 2013 (climbing to 56 in March), compared with 39 a year earlier, with the second quarter — normally the year’s low drilling point — recording 29 active rigs, up six from the same period of 2012.
If the LNG projects do get corporate approvals, the impact could be significant, said Kevin Neveu, president of Precision, which runs Canada’s largest onshore rig fleet.
He estimated 40 new rigs could be needed in North America for every 1 bcf per day of export capacity, pointing to “exciting mid- to longer-term potential.”
Neveu said LNG will be a “real bonus for us and other Canadian oilfield service companies as this business gets going.”
However, he suggested that until producers develop a better fix on their holdings and until the LNG projects pass the final investment stage, a significant revival of gas drilling is unlikely before late 2014 or early 2015.
Peter Howard, president and CEO of the government- and industry-funded Canadian Energy Research Institute, agreed that until there is a financial commitment to proceed, development of British Columbia’s shale gas resources will largely remain in a holding pattern.
But Chevron Chairman and CEO John Watson said earlier this year the lead time for LNG facilities in today’s market is “pretty close to six years.”
Bill Gwozd, senior vice president of gas services at Ziff Energy Group, cautioned that it will take three to four years to establish the gas reserves needed to underpin the LNG facilities.
“That means the inventory has to be developed and set up and parked on the side,” he said.
If Canada’s gas industry was relying solely on trends in gas prices to make its investment decisions it might be skittish.
Henry Hub prices down Despite a largely bullish first half, Henry Hub prices ended the second quarter down 11 percent from the first quarter’s front-month price of $4.02 per million British thermal units.
Houston-based PLS suggested the pull back was mostly driven by a bearish increase in storage volumes, which ended the second quarter by beating five-year averages for four successive weeks, including 98 bcf in the final week, raising working gas in storage to 2.53 tcf.
In an upbeat message for gas producers, research by Raymond James said the United States manufacturing industry is on the verge of a gas-consumption growth spurt that could see demand rise by 42 percent over the next seven years.
The firm said industrial demand could be the “most significant driver of higher long-term gas prices,” greater even than fuel-switching by power plants and LNG exports.
However, Raymond James said the surge will feed off gas prices of under $5 per thousand cubic feet over the next four to five years.
The report forecast growth of 4 percent to 8 percent in industrial demand to 27 bcf per day in 2020 from the current 19 bcf per day (or 26 percent of U.S. demand).
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